August 2, 2021

LONDON (Reuters) – JPMorgan said on Monday that Chinese regulatory changes were a local, rather than a global, problem and that the bank remained overweight emerging market equities.

The bank said while the regulation overhaul would likely continue, China would stop short of changes that cause an economic growth shock.

Chinese stocks suffered a huge sell off last week, with the blue-chip CSI300 index slumping to its worst month in nearly three years, after a string of regulatory moves aimed at the after-school education, tech and property sectors.

“We view the risk of further regulatory changes in China as a local rather than global problem,” JPMorgan analysts wrote in a note dated Monday. “Given the substantial correction in affected market segments, this risk appears to already be priced in and could ease from here.”

JPMorgan said it remained overweight emerging market equities as, excluding China’s regulatory risk, the headwinds for emerging markets appeared to be abating.

Growth, earnings and vaccination rate differentials between emerging and developed countries were all expected to converge, the bank noted.

Although Chinese credit was close to the bottom and wide valuations looked excessive, the bank noted near-term volatility was expected to remain high.

Within foreign exchange, it said it closed bullish offshore Chinese yuan trades and shifted to neutral as potential ripple effects on the currency’s portfolio flow backdrop were “concerning”, even if there was a better policy regime to prevent any repeat of the 2015-16 slide.

(Reporting by Tom Arnold; Editing by Alison Williams and Mark Potter)